Visible demand and yield strength until Dec
- SIA held a post-results analyst briefing this morning. The message was that SIA’s strong 1QFY3/23 quarterly performance will likely continue until Dec.
- This is due to the strong forward booking curve resulting in high load factors, and high premium cabin demand that has helped lift average yields.
- Reiterate Hold with unchanged TP of S$5.89, at mean FY23F P/BV of 0.95x.
Main points
? The SIA group’s ASK capacity rose from 4Q22’s 52% of the pre-pandemic base to 1Q23’s 66% and we forecast further recovery to 73% in 2Q23F and to 79% in 3Q23F, based on SIA’s guidance. Despite the incidences of congestion in European and North American airports this summer, SIA responded that its capacity restoration guidance was made after consultation with airports and ground handlers, hence for now, SIA remains confident of its guidance. Asian airports have not been as congested thus far. If the airports successfully decongest, SIA’s ASK capacity can even be raised slightly.
? Internally, SIA is also confident about delivering its ASK restoration guidance, as it is not constrained in terms of pilots and ground handling capabilities. As for cabin crew, SIA currently has 80% of the cabin crew required for its forward capacity plans, but expects to have sufficient numbers due to ongoing cabin crew recruitment since Feb 2022.
? SIA expects the strong demand in 1Q23 (Apr-Jun 2022) to continue until Dec 2022F, based on the robust forward booking curve. SIA does not have visibility beyond Dec 2022F for now. In our view, the strong demand was partly on account of pent-up travel demand, lags in competitors’ capacity restoration (due to operational bottlenecks at individual airlines), and North Asian governments’ continued closure of their borders which handed SIA greater market share of transfer traffic through Changi.
? The strong demand has been visible not only at the economy class cabins, but also in the premium cabins, which tend to fill up first. We highlight that SQ’s Apr-Jun 2022 PLF was at 82.4%, essentially back to the 83.2% seen in Apr-Jun 2019, while its passenger yield of 12.30 cts/RPK in Apr-Jun 2022 compares very well against Apr-Jun 2019’s 10.20 cts/RPK, driven by the higher mix of premium traffic since premium cabins are now fuller than they were pre-pandemic.
? Having said that, while business traffic has rebounded, the absolute volume of business travel has not yet returned to pre-Covid-19 levels. This may be because available seats for booking are so limited close to the date of departure (as business travellers tend to book late) or perhaps because of a structural shift towards fewer business trips.
? Scoot’s PLF and yield performance in 1QFY23 has lagged the flagship SQ mainly because China remains closed, while SE Asian borders were essentially reopened only from Apr 2022, leaving Scoot with little time to rebuild its forward booking profile, in contrast with SQ which has had the benefit of reinstating its long-haul flights since the Vaccinated Travel Lanes started in Sep 2021. Scoot also has not had the benefit of the strong premium travel recovery, as it only offers premium economy seating.
? Pricing among the competition remains disciplined for now, as airlines are eager to recoup losses from the pandemic, air travel demand is strong, and fuel costs are high.
? The performance of SIA’s cargo division in 1QFY23 could have been better if not for China’s pandemic shutdowns, and is now recovering with stops and starts due to the on-and-off nature of the lockdowns. SIA noted that the outlook for the year-end cargo peak season is unclear, as in our view, businesses in the US and Europe struggle with high warehouse inventories and as consumers tighten their belts due to inflation. For now, however, cargo yields are holding up at high levels relative to their recent history, and this shows that demand for airfreight is still outstripping supply; SIA noted that historically, air cargo players tend to cut their rates quickly at the first instance of excess supply, and the fact that this has not yet happened, suggests that airfreight markets remain strong currently, not least because of the restriction in airfreight capacity between Europe and North Asia as a result of the avoidance of Russian airspace.
? SIA will keep an eagle eye on operating costs and will continue to work on its ongoing transformation plan that involves hundreds of initiatives to lower structural costs.
